Super overhaul slashes fees

Superannuation funds will be forced to lower fees and provide members with similar protections to depositors and insurance policyholders under new rules to be released today by the federal government.

Retirement schemes will also be forced to obtain a special licence in order to operate a low-cost default MySuper fund, which eventually will be the only retirement product automatically offered to members.

The overhaul of funds, which includes a raft of back-office measures, is estimated to reduce member fees by up to 0.4 per cent annually, which the government predicts will add $40,000 to the retirement savings of a 30-year-old worker earning the average wage.

The measures are contained in an extensive package of reforms in response to the Cooper report – a recent review of Australia’s $1.3 trillion super industry.

The changes are likely to accelerate consolidation among superannuation funds as they work to offer lower cost options to members and gain efficiency. Last month First State Super and Health Super announced they would merge to create Australia’s fifth largest super fund.

Financial Services Minister
Bill Shorten
said the reforms would strengthen the economy and improve productivity by raising the total ­savings pool.

“Every dollar Australians save from the removal of unnecessary fees and charges will directly boost their retirement savings, increase their wealth and boost national savings," Mr Shorten said.

“These reforms will strengthen the economy by increasing Australians’ superannuation savings and therefore, our national savings. More domestic savings will be available for investment in nation-building pro­jects, lessening Australia’s need for foreign savings," he said.

Related Quotes

Company Profile

Under the new rules, the Australian Prudential Regulation Authority (APRA) will be given greater oversight powers over retirement funds.

The regulator will be able to establish operational and performance standards, including rules governing the reporting of performance figures.

The package of changes is the last of three sets of reforms undertaken by the federal government, aimed at raising standards in the financial services industry and protecting savers. The timing is critical, given that the super industry is set to grow to $6.2 trillion by 2036.

The Cooper review was commissioned by the government early last year because of concerns that ­workers, who by law must contribute 9 per cent of their salary into super, are being overcharged by inefficient schemes that are failing to keep a lid on costs.

Mr Shorten said that if the industry adopted the reforms, it would help its campaign to raise the super guarantee to 12 per cent.

The previous government under Kevin Rudd proposed an increase in compulsory contributions, but the issue has dropped down Prime Minister
Julia Gillard
’s policy agenda.

“If you want to get more money into the system, you need to be more efficient," Mr Shorten told The Australian Financial Review. “The super industry has a role to play in the long-term interests of members."

The measures contained in the Cooper review are also designed to improve the governance of self­managed schemes.

Most are aimed at service providers such as auditors, although the government said it would introduce criminal and civil sanctions for promoters of schemes that enabled members to withdraw money from their accounts illegally, and give the Tax Office greater powers to penalise fund trustees who breached the super rules.

Industry Super Network, which ­represents not-for-profit industry schemes, welcomed the government’s acceptance of the majority of recommendations laid out in the Cooper report.

“I think it’s good," ISN executive manager David Whiteley said. “It is a reflection of the fact that compulsory super has not created 12 million active investors. The vast majority of members who don’t choose their own fund need adequate and effective protection."

The government will provide an additional $30 million in funding over four years to APRA and the Australian Securities and Investments Commission, which will also be granted extra policing powers, to enable them to carry out their enhanced supervisory roles.

However, the costs of implementing MySuper will be partly recovered from the funds through higher levies to APRA, while the cost to the government relating to some of the administrative reforms – known as SuperStream – will be recouped through a separate temporary levy.

Mr Shorten declined to say how much the levies would be, but insisted they would be small in comparison to the proposed savings.

One of the key concerns of ministers is that many Australian super funds are too small to benefit from economies of scale and it is hoped that the reforms will trigger consolidation in the industry.

The Financial Services Minister noted yesterday that despite Australia having the fourth biggest superannuation sector in the world, no local schemes were in the largest 25 globally. AustralianSuper is the country’s biggest super fund, with $34 billion under management.

Mr Shorten rejected suggestions small funds could be forced to close, but noted scale was a “driver of cost".

Jeremy Cooper
, a former ASIC deputy chairman who headed the review, argued heavily that larger funds were more efficient because they were better able to invest in technology, improve services and diversify their investments. One of the key features of MySuper – a central plank of the super review – will be a duty on the part of trustees to “deliver value for money as measured by long-term net returns, and to actively consider whether the fund has sufficient scale."

Mr Shorten said he was giving ­trustees an “explicit duty" to look for low-cost options. “Trustees will be focused on net returns, of which cost is a big component. It is time we put a requirement on trustees to look at costs." However, he said “some" existing default funds already had a low cost base.

MySuper funds will also be required to set new standards for the payment of performance fees to specialist fund managers, ban entry fees and commissions, standardise their reporting of returns to the regulator and justify any cross-subsidisation of costs.

The government will force ­MySuper funds to develop a separate investment strategy for retired members, who rely on income streams in lieu of a salary.

“We will need innovation," Mr Shorten said. The minister has set a deadline of mid-2013 for the introduction of MySuper and will start consulting with the industry on its implementation early next year.

The Association of Superannuation Funds of Australia’s chief executive, Pauline Vamos, argued that time was limited, given that legislation would need to be drafted by the end of next year to meet the 2013 deadline. Ms Vamos also warned that the ­consultation process needed to be thorough to make sure any un­intended consequences were avoided.

“We need to ensure the consultation process goes well," she said.

Giving APRA greater supervisory powers is likely to be one of the most controversial measures.

The regulator has been pushing for the power to establish operational and performance standards, on the grounds that the system would promote best practices among trustees, would be flexible, and enable APRA to govern funds more closely.

APRA complained recently that it was hampered during the global financial crisis in its efforts to monitor fund liquidity, but many industry executives and lawyers have ex­pressed disquiet at the notion of the prudential regulator being given more power. APRA already has powers to spe­cify standards in relation to the banks and life and general insurance companies.

Mr Shorten said he expected APRA’s experience in overseeing the banks and insurers would “inform their approach" towards greater oversight of super funds.

Financial Services Council chief executive
John Brogden
welcomed the requirement for funds to hold reserves to guard members against operational mishaps, such as ­mispricing of units.

“You can’t afford for a super fund to be insolvent," Mr Brodgen said.

The government rejected recommendations made in the Cooper report to require super funds to appoint independent directors to their boards.